REAL DEFAULT-FREE INTEREST RATES SHOULD BE POSITIVELY RELATED TO GDP GROWTH AND POSITIVELY RELATED TO THE EXPECTED VOLATILITY OF GDP GROWTH

8. C is correct. Real default-free interest rates should be positively related to GDP growth and

positively related to the expected volatility of GDP growth. If there are expected increases in

GDP volatility then there would be upward pressure on short-term default-free real rates, all

else being held equal. Section 3.2. LO.c.